FASTENAL CO Quarterly Report for Q3 Ended Sep 30, 2008

Summary

Fastenal Company reported strong revenue growth in the third quarter of 2008, with net sales increasing by 17.1% year-over-year to $625 million. This growth was driven by a combination of higher unit sales and modest price increases, reflecting resilience despite a weakening industrial environment. The company's 'Pathway to Profit' initiative, focused on expanding its outside sales force and optimizing store operations, appears to be gaining traction, as evidenced by improving daily sales growth in older store cohorts. However, the company incurred a significant $10 million legal settlement expense in the quarter related to an Assistant General Manager classification lawsuit, which impacted earnings per share by approximately $0.03. Despite the economic headwinds, Fastenal demonstrated improved gross profit margins, benefiting from efforts to manage product costs, source more effectively, and optimize freight operations. While operating and administrative expenses grew faster than sales, partly due to the legal settlement and increased transportation costs driven by higher fuel prices, the company is showing leverage in occupancy costs. The balance sheet remains solid, with continued inventory management efforts leading to inventory growth below the rate of sales growth, although accounts receivable saw a notable increase driven by higher sales volumes and additional selling days. Management remains focused on improving working capital efficiency, aiming to restore the annual sales to accounts receivable and inventory ratio to above 3.0:1 to drive returns.

Key Highlights

• 1Net sales grew by 17.1% to $625 million in Q3 2008 compared to the prior year.
• 2Daily sales growth rates in older store cohorts (over 5 and 10 years) showed acceleration, indicating resilience.
• 3Gross profit margins improved year-over-year, driven by cost management and sourcing efficiencies.
• 4A $10 million legal settlement expense negatively impacted Q3 2008 earnings, reducing EPS by approximately $0.03.
• 5Inventory growth (10.0%) lagged behind sales growth (17.1%), indicating improved inventory management.
• 6The company continues to repurchase shares and pay dividends, demonstrating commitment to shareholder returns.
• 7Operating and administrative expenses grew faster than sales, influenced by the legal settlement and rising fuel costs impacting transportation.

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